Bank of Canada pumps $3B into overnight $ markets

October 2, 2007

The Bank of Canada for the third straight business day has added additional liquidity to the overnight money market in order to support its target overnight rate. Since last Thursday the Bank has added close to 3 billion dollars to the overnight market. They are sensibly doing so in order to calm the markets that are roiled by the recent crisis in asset backed commercial paper.
The problems in unfreezing this market continue. The standstill that the financial institutions who were holders of 30 billion dollars of the paper had agreed to in August was due to expire October 15. But since reaching an agreement on how the burden would be divided and positions unwound has proved more difficult than originally thought the standstill has been extended. Over the past year a total of 70 billion dollars a month in CDOS (collaterized debt obligations ) had been issued world wide. This past September only 17.3 billion were issued. former FED chairman Alan Greenspan warned in London today that CDOs need to be rethought and that the crisis in   the sub-prime mortgage market was really a crisis in the financial derivatives market.

Other officials at the Bank of England are pointing out that the CDOsmarket is not well understood, not transparent enough, and improperly regulated. It is estimated that 1 in 5 of existing CDOs are at risk of going out of business. So the market is far from being out of the woods at the moment.

But apparently these dire circumstances don`t daunt the Desjardins Securities Inc. a major Québec financial player who have announced the creation of a new company partnered with a Toronto financial company called Bodiam financial inc. to `manufacture ABCP(asset backed commercial paper) and other financial products that are to liquid, transparent and high quality. (Globe and Mail, p.B10)

Desjardins hopes to fill the vacuum caused by the troubles that afflicted Coventree, Inc that specialized in these products. What will be the difference ? Supposedly
the new company will be more transparent and its assets better rated. Bonne chance Desjardins!

The mess in this area and the degree of Ponzi finance character that it displays is a definite warning sign about the dangers of financial derivatives for the stability of the system. With the disappearance of newly issued government debt because of the past decade of surplus budgeting there will be greater risk that investors will   be mired in   excessively risky investments. It is one of the less well understood consequences of sound finance and balanced budgets obsession.

Mind you, I for one warned about precisely this many years ago.Just read my essays on the deficit debt controversy which go back as far as the early 1980s in which I pointed out that government debt represented sound sovereign nation assets in which to invest that compared very favourably with most(and probably all) assets proferred from the private sector for investors looking for moderate returns and low risk.

Oh well, better late than never for some to learn this fact.